A scenario… I’ve just turned 50 years old and I wake up after my party with a belly full of bourbon and birthday cake to realize I’ve forgotten something. No, I didn’t forget to delete the party pics off my iPhone – it’s worse. I’ve forgotten to save any money for retirement. Now as I look past 50 and beyond, what is may plan?
A thanks to some Facebook friends for requesting a look at the late-bloomer – the saver who forgot to save. We’ll have to rely on averages here and paint with very broad strokes, but let’s take a look at what happens in this scenario.
First off, with no money in the bank, I’m most likely looking at retiring at 70, giving me a 20 year timeframe to build a nest egg. Had I planned on retiring earlier, I would’ve fired this machine up after the roaring-forty party or even earlier, right?
The average couple at the age of 70 brings in $2,100/month in Social Security benefits, while the average retiree household budget is $3,700/month. That leaves me with a shortfall of $1,600/month or $19,200/year if I want to retire. Unless I’m planning on doing a lot of Walmart greeting in my 70’s, I need to make up that difference.
Now – a very important point – there’s nothing wrong with working at a Walmart, or anywhere else, well into your 70’s, but there is a big difference between want to and have to. I definitely want to be in the want to column…
Rate of Withdrawal:
Market history shows a withdrawal rate of 6.5% on your nest egg has been a workable rate of withdrawal to ensure your savings outlast your spending needs in retirement. Many financial planners back that down to 4% to allow for wild swings in the market (like 2008-2009) in an effort to ensure a huge market downturn does not take away your ability to withdraw enough to live on. For purposes of this scenario, I prefer a 5-6% withdrawal rate. I think it’s safe enough to be reasonable and effective enough to ensure our money is well deployed for our needs.
So… I’m $19,200 short per year on my ability to retire. If we divide that by 5% we see I’ll need a nest egg of $385,000 to make it happen. Sweet Lord, I have 20 years to save up almost $400-large! Can I do it?
While the stock market averages 11% per year over the long term, I am going to factor an 8% return to account for the fact that a 50 year old investor on a 20 year time line does not need to be 100% invested in stocks. I’d expect to see an 80/20 or 70/30 stock to bond mix, and I’d be happy with an 8% annual return over this timeframe with a moderate allocation – this should be doable.
For this allocation I would suggest something along the lines of a very low cost S&P500 index fund like SWPPX and then some active bond funds that will get you a broad bond exposure and beat the aggregate bond index quite easily. In the past I have recommend DLTNX & PONDX.
With this allocation I can survive big swings in the market and I can rest easy knowing that if I hit 70 at a time when Goldman Sachs has the American taxpayer bent over their boardroom table again, I’ll still be able to draw that 5% and make it to age 71 and beyond.
So I fired up a retirement calculator to consider my scenario – I’m 50 years old starting with $1 (surely someone gave me a dollar bill for my birthday) and I need to get to $385,000 in 20 years. The calculator says I will need to save $650 per month with an annual return of 8% across those 20 years. Well dang, there goes the lease on that fancy Corvette I needed for my mid-life crisis…
What I don’t like about this plan:
1 – No margin for error. I must be diligent about my investing month in and month out, the stock market must perform to historical averages over my 20 year window, my health must allow me to work from age 50 to 70 in a full-time capacity, and my budget must be rock solid in my retirement years with little wiggle room.
2 – Total dependence upon the government. Without Social Security my minimal plan does not work so I must hope & pray there are no benefit cuts or other Washington DC shenanigans that might lower my benefits.
How about a youngster finishing school and landing a good job? Let’s say he’s 25 and starts packing away $500/month with a plan to retire at 55. Since he’s younger and has a longer time span, he can get more aggressive with his stock allocation and shoot for an 11% return – totally doable over 30 years based on market historical averages.
For this allocation I would go back to SWPPX as a core investment and then overweight various market sectors based on ever-changing macro and micro economic conditions and world events. I’d forego bonds until I was 10 years or so from retiring, again basing that timing on economic conditions and world events.
At age 55, as my scenario above still has me scrambling to catch up, this young buck is a millionaire of the same age. I’ll be working until I’m 70 but this kid will be kicking back at age 55 with $1.3 million to live off of, meaning he can pull down a “self-directed salary” of $65,000 per year or roughly $5,400 per month with the same 5% withdrawal rate. This kid will not be working at Walmart.
What I like about this plan:
1 – A wide margin for error. At 55 your options are wide and varied in terms of working or taking it easy. You will have a lot of the want to options, and not many of the have to demands. For most, ages 50-70 are more healthy than 70 and beyond. Wouldn’t you like to retire when you’ve still got a little more gas in the tank? Or at least have that option?
2 – No dependence upon the government. With this plan you could take Social Security retirement at 62 (instead of 70) and use your benefits as extra “fun money”. With a modest lifestyle, however, you will not have to be wholly dependent upon Social Security in order to survive. This, to me, sounds like true financial freedom.
An early retirement plan like this will depend upon frugality and modest living. This plan would not allow for massive debt, country club memberships, extravagant vacations, and/or car leases that you can’t afford. Credit cards are out of the picture too, as is debt.
Consider recent surveys that show 45% of all households, and 41% of all near-retirement households, do not have a retirement account at all. A 2015 National Institute on Retirement Security study found that the median working-age household has just $14,500 in retirement savings. There are a lot of people living out my scenario in real life. It is time to get on the move…
Sum It All Up:
So there it is – a look two different scenarios for saving for retirement. On one hand we procrastinate and on the other we approach it proactively. I know I like the idea of kicking back at 55 with the freedom to do as I please. The idea of scrambling around to stay out of WalMart at age 70 so I don’t have to pass out grocery carts in order to buy a bologna sandwich for lunch has me thinking I might chip in a little extra into my Roth over the next few months…
Thanks for reading – cheers!
disclaimer: I am long SWPPX, DLTNX, PONDX. I am not an investment professional, so if you find yourself in these scenarios please consider consulting a reputable fee-based & licensed financial planner to help you determine the best path forward given your particular situation – but there is a path forward…